A bad, likely, and seldom mentioned scenario for the US during the next few years

Summary: Summary: Rising inflation would be bad. But there is something that might make inflation far worse, is more likely, and almost never mentioned: prices rising faster than wages..

About the past

The cost of living rose during the great inflation of the 1970’s. But people got by because wages also increased, the value of their home rose, and their debts were inflated away. Only in 1978 did things spiral out of control, with prices rising faster than wages. Then the public turned against inflation, and President Carter appointed Paul Volcker as Fed Chairman in August 1979. As seen in these graphs from the St. Louis FRED database about private industry hourly wages and the CPI {there are many measures of wages, each has measuring one aspect well; these are both BLS data series}.

About today

The Fed governors worry (like any sensible people) about the CPI flirting with deflation. Falling prices drives asset prices down. Worse, they drive down wages — while people’s debts remain fixed. That vise crushes the middle class (the poor don’t have debts; the rich have real asset wealth). But the Fed’s printing presses can prevent deflation (or at least severe deflation, if not necessarily Japan-style deflation-lite).

But the opposite condition is equally bad — and also looking more likely. Wages rising slower than prices. That’s death for the debt-heavy US middle class. The US is flirting with this today.

Boomers assume that wages will follow if prices rise. That’s not necessarily true (especially with competition from the emerging nations with far lower standards of living and costs). Inflation might not be the get-rich-quick scheme imagined by many Boomers (described in the previous post).